China Telecom Becomes Nation’s Second Carrier Selling IPhone

Feb. 21 (Bloomberg) -- China Telecom Corp. will become the
nation’s second wireless operator to offer Apple Inc.’s iPhone
4S, two months after “staggering” demand prompted the U.S.
company to suspend sales at its own stores.

From March 9, users who commit to a two-year contract can
get a free 16-gigabyte handset with a service plan costing 389
yuan ($62) a month, the state-owned parent of China Telecom, the
nation’s third-largest wireless carrier, said in a statement
today. A three-year plan cuts the monthly minimum to 289 yuan.
China Telecom shares rose the most in six months.

For Apple, adding China Telecom as a distributor in the
world’s largest mobile-phone market almost doubles the number of
potential iPhone buyers who can get a subsidized handset from a
service operator. That may alleviate some of the supply
bottleneck that led to Apple’s main Beijing store being pelted
with eggs when it didn’t open for the first day of iPhone 4S
sales in January.

“This is definitely going to give a plus to Apple
shipments,” said Sandy Shen, a Shanghai-based analyst at
research company Gartner Inc. “On the other hand, China Telecom
is still the country’s smallest mobile operator, so the extent
to which it can help Apple may be limited.”

China Telecom shares gained 4.1 percent to close at HK$4.60
in Hong Kong trading, the largest gain since Aug. 25.

China Unicom

China Unicom (Hong Kong) Ltd., the nation’s first carrier
to offer the iPhone with a service contract in October 2009,
began selling the 4S in January. China Unicom had 43 million
subscribers to its high-speed, third-generation network at the
end of January. China Telecom had 38.7 million 3G subscribers at
the end of last month.

Apple was the fifth-largest smartphone vendor in China in
the fourth quarter, with shipments of 2.08 million handsets, or
7.5 percent of the total, according to Gartner data. Samsung
Electronics Co. was the market leader with 24 percent, followed
by Nokia Oyj, Huawei Technologies Co. and ZTE Corp., according
to Gartner.

China Telecom will make an “appropriate increase in
marketing initiatives” in connection with iPhone sales, the
company said in a filing to the Hong Kong stock exchange today.
Expenses to market the phone will mean “short-term pressure on
its profitability,” it said, without providing figures.

Earnings Estimates

“The iPhone will be positive for China Telecom’s
subscriber growth, but it will be negative for earnings growth
in the first year,” Lisa Soh, a Hong Kong-based analyst at
Macquarie Group Ltd., said in a phone interview today.
“Earnings estimates will have to come down because of higher
subsidies for the iPhone.”

Soh said she hadn’t updated her earnings estimates yet to
account for iPhone sales. China Telecom’s earnings growth could
be cut roughly in half to about 5 percent, said Jim Tang, an
analyst at Shenyin Wanguo Securities Co. in Shanghai. Higher
iPhone subsidies will force the company to cut subsidies for
cheaper models that have been the main driver of user growth,
Tang said.

Cupertino, California-based Apple had underestimated the
“staggering” demand for the iPhone 4S when it started sales in
China, Chief Executive Officer Tim Cook said last month.

“We thought we were betting bold,” Cook said on a Jan. 24
conference call. “We didn’t bet high enough.”

Pelted With Eggs

Apple’s oldest store in China was pelted with eggs from a
crowd of customers on Jan. 13 when the shop, in Beijing’s
Sanlitun district, failed to open on the first day of sales for
the iPhone 4S. After police sealed off the area to remove more
than 500 people, Apple said it would suspend sales of iPhones at
all its stores.

IPhones are available in China through Apple’s online
store, resellers and China Unicom.

“IPhone 4S has been an incredible hit with customers
around the world,” Carolyn Wu, a Beijing-based spokeswoman for
Apple, said by phone. The company “can’t wait to get it into
the hands of even more customers in China,” she said.

China Mobile Ltd., the world’s largest carrier by
customers, is now the only Chinese wireless company not offering
the iPhone with a service contract. The iPhone doesn’t support
the provider’s third-generation network, based on a China-developed technology.